Sun Microsystems CEO Jonathan Schwartz faced tough questions Wednesday from impatient shareholders who have seen the value of their stock tumble as Sun struggles to grow its business.

The shareholders voted to reelect Sun's board of directors at its annual stockholder meeting, but they also expressed deep frustration with Sun's performance and concern about its future.

"The fact that the stock has been diving and diving and diving and is never pulling out of this dive, you start to wonder -- how long can you keep diving before you lose all your stockholders?" asked one shareholder during the question-and-answer period. "How long can you be in freefall and still survive?"

"Why is Sun falling while HP and IBM's revenue continue to increase?" asked another shareholder. "What's Sun's strategy for leading the market? Lately it's been a case of you either lead or you lag, and Sun Microsystems has been in the lagging category."

Sun's shareholders have had little to give them cheer lately. Last year, with its stock hovering close to US$5, Sun performed a four-for-one reverse stock split that lifted the price of its shares to more than $20. But they have since tumbled to below where they started, closing Wednesday at $4.62.

One stockholder said the split reduced the "intrinsic value" of his shares. "This was a very bad deal for me as a stockholder; I'm sorry it happened," he said.

Schwartz responded by reiterating arguments he has made in the past. Sun is positioning itself for growth by developing innovative new server systems, he said, and by trying to expand its addressable market by attracting new customers with its open-source software, including the MySQL database it acquired earlier this year.

"Historically, the problem for Sun has been expanding beyond our traditional customers," he said.

Sun hopes the free software will help it build ties to new businesses that may later become paying customers for Sun's servers and other commercial products. But the strategy takes time, Schwartz admitted, and it has not happened quickly enough to offset an ongoing decline in Sun's high-end server business.

The economic crisis is compounding Sun's problems. "We've seen the credit crisis extend to many of our largest customers, and that has had an impact on their capacity to purchase from Sun, as well as in some cases their capacity to maintain themselves as independent businesses," Schwartz said.

Sun grew its business quickly during the Internet boom years a decade ago. It positioned itself as the "dot" in dot com, and companies bought its powerful Unix servers to run their online operations. But with the crash after 2000, many companies turned to more affordable, industry-standard servers running Windows or Linux.

Sun now sells those industry-standard servers, but it came late to the market and is growing that business from a small base. It is also developing a new line of multithreaded server processors, dubbed Rock, but the products have been delayed and are not expected until the second half of 2009.

Sun is suffering more than HP and IBM because Sun's business is focused narrowly on the data center, Schwartz said, while HP and IBM have consumer and outsourcing businesses that act as a buffer in tough times.

The reverse stock split was necessary, he said, because the low share price made conversations with potential new customers difficult. "If we could do it again, I would do it again," he said.

"When the stock was at $24, that put us in a very different selling position than when we were defending a share price of less than 10 bucks. We're obviously not happy about that and we're doing something to improve it," he said.

The shareholders Wednesday reelected each of Sun's board members, including Schwartz, with at least 94 percent of the votes cast, according to a preliminary tally, Sun said. They defied the board's recommendation in one area, by approving a measure that would give them more of a voice in the compensation paid to executives.

Like shareholders at Yahoo and Google earlier this year, Sun's shareholders also voted down a proposal to create a committee that would oversee the effects of Sun's policies on human rights in developing countries.

The meeting was held at Sun's offices in Santa Clara, California, and was webcast. There is a replay on Sun's Web site.

IDG News Service

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